Housing market prices increased by about 15% over the last year. It’s a hot market, and what’s driving that is a severe drop in inventory.
That makes buying a home difficult as it costs more and price increases are outpacing rises in incomes. You need to depend on ways to finance real estate that enables you to buy a home and make your bid competitive.
Keep reading to learn the top ways to finance buying a house.
1. All-Cash Purchase
About 36% of all real estate sales are pure cash deals. Cash deals are more attractive to sellers because you don’t have to wait to have a loan approved. Plus, the loan isn’t always approved, which puts the house back on the market.
Cash purchases are usually used by investors because they have the funds available. For homebuyers, you can pay with cash and save thousands on interest.
The problem is how to save up enough money to pay with cash. You can save up for years, invest your savings wisely, or sell your home.
2. Conventional Mortgage
When you think about buying a house and financing the deal, you usually start with a conventional mortgage. This is a traditional 30-year loan where you pay off the principal and interest over time.
In order to get a conventional mortgage, it needs to be for an amount less than the standard set by the Federal Housing Finance Agency (FHFA).
You also have to have a great credit score in order to get the loan approved. A good credit score also gives you a much better interest rate, which will help you save money over time.
3. Jumbo Loan
What if you need to finance real estate that exceeds the amount set by the FHFA? Well, there’s a loan for that.
It’s called a jumbo loan because it’s larger than conventional loans. Just because you have an option to get a jumbo loan doesn’t mean that you can go out and buy a $900,000 home.
Since there’s more money at stake, these loans are heavily scrutinized before they’re approved. You need to have outstanding credit and meet income to debt ratio thresholds.
Most lenders will require that you put more money down on the real estate purchase. If you are planning on a jumbo loan, expect to pay 20% down.
This resource on jumbo loans explains them in detail.
There’s a good chance you’ve heard of rent-to-own homes. It is possible to finance real estate this way, though you have a lot to look out for.
With a lease-purchase deal, you agree to buy the home at the end of the lease for a set price. It could be above or below market value.
The money that you pay in rent is applied toward the down payment of the home.
This is an attractive option for people who have a hard time saving up for a down payment or can’t get traditional financing.
Since it’s an attractive option, it’s full of scams. You could enter an agreement for a home full of mold or other structural issues that you’re suddenly responsible for.
They might ask for a lot of money upfront as a deposit, then take off with your cash.
5. Adjustable-Rate Mortgage
When you get a conventional mortgage, the interest rate that you get now is the rate for the entire life of the loan. That keeps your monthly payments the same every month.
Interest rates right now are at historic lows. That’s a big part of why so many people want to buy right now.
An adjustable-rate mortgage works differently than a conventional mortgage. You can still get a 30-year loan, but you have to expect changes in your monthly payments.
The payment terms change according to the current interest rates. If you get out a loan now and interest rates rise, your monthly payments will rise with the rates.
On the other hand, if interest rates drop, then your payments will drop along with them.
You can usually get a really good rate for the first few years of the loan, then your payments will be adjusted according to the rates at that time.
6. FHA Loan
First-time homebuyers make up about a third of the real estate market. Even though it’s a tough housing market right now, first-time homebuyers can get loans to make that first purchase.
FHA loans are backed by the Federal Housing Administration (FHA). These loans let you buy a home with as little as 5% down. That can turn into a huge boost for first-time homebuyers who are struggling to save and pay off student loans.
7. VA Loan
Are you a veteran? There are loan programs designed specifically for veterans and surviving spouses. VA loans are partially guaranteed by the Veterans Administration (VA).
The big advantage of this loan is that you can buy a home with no money down. You also don’t have to carry mortgage insurance.
You can usually get a much better interest rate and lower closing costs, too.
8. Real Estate Partnership
If you’re looking to buy a property as an investment, you could create a real estate partnership. This is where you team up with other investors to finance real estate transactions.
You do need to be careful about who you partner with and have iron-clad agreements in writing. This can be a great way to finance real estate without carrying all of the risks.
Finance Real Estate Any Way You Want
When you think about ways to finance real estate, you usually think about a conventional 30-year mortgage. The truth is that you have many more options available to you.
You can leverage your status as a first-time homebuyer or veteran. You can also take out a jumbo loan or create a partnership with investors.
In all cases, you stand to put yourself to get ahead in a competitive real estate market. If you enjoyed this article, be sure to see what else is happening in the Money section of this site.